Educational Articles

Using The Value Line Page: Going Far With Travelers

J. Susan Ferrara
| July 25, 2016

Dow-30 component The Travelers Companies (TRV - Free The Travelers Companies Stock Report) may not have much wow factor at first blush, but there are certainly some things to like about it, which make it an interesting selection. With its solid fundamentals and strong position in the industry, the property/casualty (P/C) insurance titan’s placement among the elite group of stocks is surely well-deserved. After its steady upward run in price over the past five-plus years, the blue chip seems set to lose some steam, though it still may be worth keeping on the radar for specific investment objectives.

Although TRV’s results haven’t always moved in a positive direction, the insurer’s brawn is clear. Even when disastrous weather events have struck, Travelers has forged ahead. That was evident in 2010-2012, when unfortunate events occurred, including Hurricane Sandy in late 2012, which left behind widespread devastation and billions of dollars-worth of property damage, not to mention the loss of life. While many P/C insurers were severely crippled by the catastrophe, Travelers managed to emerge relatively unscathed, despite incurring heavy losses.

Since then, TRV’s operating performance has not failed to impress. In recent years, milder storm seasons, along with a high-quality book of business amid a very favorable pricing environment, have immensely benefited this insurance heavyweight. And that has not gone unnoticed by Wall Street, as the rising stock price illustrates in the Graph section of the Value Line page. But results for the first half of 2016 suggest a slowdown may be at hand. (Note that second-quarter numbers were released recently and thus not shown on our full-page report dated June 10th.)

From the Statistical Array and quarterly boxes, we see that earnings are likely to slip in 2016 before modestly rebounding in 2017. That’s largely due to tough comparisons, following record-level profits registered in the prior year. Indeed, we expect a moderate rise in Premiums Earned, or the amount of money (“premiums”) an insurer receives from policyholders as compensation for the risk it assumes. While some new business wins and higher pricing on renewals have helped the top line, heightened competition will likely lead to a soft rate environment, making it more difficult to implement price (rate) hikes near term.

More importantly, the Underwriting Margin (Array), a key metric that gauges the profitability of a company’s core insurance operations, is due for a decline. The measure, which is commonly referred to as the “combined ratio” and derived by the difference between 100% and the sum of the loss and expense ratios, is likely to deteriorate as low catastrophe levels (from weather events) seen in the recent past are probably unsustainable, a sentiment echoed in the Commentary section of the page by analyst Alan G. House. Losses on claims filed and catastrophes, together with an insurer’s risk exposure, as well as policy writing/actuarial and other administrative expenses, are the chief factors that influence the combined ratio. As a rule of thumb, the bigger a positive underwriting margin, the better. Based on the analyst’s forecasts, TRV’s combined ratio shouldn’t be too shabby. Currently, it is above the industry average, a testament of the company’s superior underwriting ability over of its competitors.

Elsewhere, Travelers’ investment portfolio could be doing better, as implied by Investment Income per share and Investment Income/Total Investments, both displayed in the Array. Given that most of TRV’s holdings are fixed-rate securities (bonds) and interest rates have still been near historical lows, returns have been rather light in recent years, although that should improve if the Federal Reserve raises rates later this year. Meanwhile, Price-to-Book Value (or the stock price against the value of the insurer’s assets) is another essential, often-used valuation guide, perhaps more so than P/E, that helps in deciding whether or not to invest in an insurance equity. A percentage below 100% means the stock is undervalued, whereas a figure above 100% implies that the issue is overvalued. At present, TRV seems somewhat overvalued.

Still, from an investment perspective, Travelers has allure. True, with a rank of 3 (Average) for Timeliness (Ranks box), the Dow member is not a standout for year-ahead relative price performance. And the three- to five-year capital gains potential seems muted at the recent price level (Projections box). On the other hand, the dividend yield (Top Label) is not bad, while the estimated long-term growth of the payout (Annual Rates) looks to be reasonable for the insurance industry bellwether.

In the meantime, too, the issue boasts an excellent risk profile, with a Safety rank (Ranks box) of 1, Highest, indicating that TRV is among the least risky selections in our universe. That’s supported by a top-notch mark of A++ for Financial Strength, reflecting healthy finances, while outstanding scores for Price Stability and Price Growth Persistence add even more appeal. These measures are found in the Ratings section at the lower right-hand corner. On the whole, the stock’s three- to five-year total return prospects (price appreciation plus dividend hikes) are fairly solid, especially on a risk-adjusted basis.

So, while the average investor may be tempted to take a pass on Travelers, the blue chip, preferably on a share-price pullback, would be a good pick for conservative, income types seeking to add stability to a diversified portfolio.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.